MOODYS.COM

24 OCTOBER 2016

NEWS & ANALYSIS Corporates 2 » SUPERVALU’s Sale of Save-A-Lot Business Would Reduce

Leverage, a Credit Positive » Abbott’s Vascular Products Sale Is Credit Negative » VeriSign’s Extension of .Com Registry Agreement Is

Credit Positive » Glencore’s Disposal of Its Australian Rail Asset Is Credit Positive » SGL Carbon’s Sale of Its Loss-Making Graphite Electrode

Business Is Credit Positive » UPC’s Acquisition of Multimedia Polska Will Be Credit Positive » COFCO Meat’s Planned IPO Is Credit Positive for COFCO HK

Banks 9 » Brazil’s Rate Cut Is Credit Positive for Banks » Lebanese Banks’ Decline in Foreign Assets Is Credit Negative

Sovereigns 13 » Croatian Parliament’s Broad-Based Support for New

Government Suggests Credit-Positive Stability » Namibia’s Increase to Teachers’ Salaries in Fiscal 2018 Will

Challenge Fiscal Consolidation » Zambia’s Sizable Fiscal Deterioration Is Credit Negative

Sub-sovereigns 18 » German Laender Will Benefit from Changes to Financial

Equalisation System » Italian Regions Will Benefit from Higher Healthcare Funding

in 2017

RECENTLY IN CREDIT OUTLOOK

» Articles in Last Thursday’s Credit Outlook 20 » Go to Last Thursday’s Credit Outlook

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NEWS & ANALYSIS Credit implications of current events

2 MOODY’S CREDIT OUTLOOK 24 OCTOBER 2016

Corporates

SUPERVALU’s Sale of Save-A-Lot Business Would Reduce Leverage, a Credit Positive On Monday, SUPERVALU Inc. (B1 stable) announced that it had entered into a definitive agreement whereby an affiliate of Onex Corporation will acquire SUPERVALU’s Save-A-Lot business for $1.365 billion in cash. The sale will be credit positive for SUPERVALU because the company will use the sale proceeds to repay its term loan, improve its capital structure and fund growth initiatives. Save-A-Lot is SUPERVALU’s hard discount segment aimed at value-seeking shoppers.

The current term loan agreement mandates that SUPERVALU repay the first $750 million of the sale proceeds and 50% of the remaining proceeds until reported pro forma post-sale senior secured leverage falls to 1.5x. If SUPERVALU reduces its debt only by the amount mandated by the credit agreement, its lease-adjusted debt/EBITDA will only decline modestly from its 8 June 2016 level of 4.7x. However, the company can repay an additional amount of its term loan, further reducing its leverage. Based on our estimates, SUPERVALU could improve its pro forma post-sale debt/EBITDA to around 4.25x from 4.7x if it uses $1.0-$1.1 billion of the sale proceeds to repay its term loan.

The leases associated with the Save-A-Lot stores will further reduce lease-adjusted debt by about $300 million based on a 5x rent multiple. Save-A-Lot currently generates around 28% of the SUPERVALU’s EBITDA and we estimate that the sale will reduce SUPERVALU’s EBITDA by about $200 million. A significant debt reduction above and beyond the amount mandated by the banks could result in an upgrade. Any ratings upgrade will require sustained debt/EBITDA of below 4.25x and sustained EBIT/interest of more than 2.5x.

SUPERVALU’s Save-A-Lot business segment currently generates about 28% of total revenues, with the wholesale distribution business and retail segment together constituting the rest. Post sale, SUPERVALU’s wholesale distribution business will account for more than 60% of its top line, with the retail segment composing the remainder. We expect the remaining businesses to have lower revenue growth and lower operating margin than the Save-A-Lot business.

The Save-A-Lot format includes approximately 896 licensed and 472 company-owned and operated stores. The 896 licensed Save-A-Lot stores are built and operated by third parties, and are supplied by Save-A-Lot’s 17 distribution centers, which provide wholesale distribution to the company’s owned and licensed Save-A Lot stores. In connection with the sale, SUPERVALU and Save-A-Lot will enter into a five-year professional services agreement under which SUPERVALU will provide Save-A-Lot with certain services and support functions for its daily operations, including cloud services, merchandising technology, payroll, finance and other technology services.

Operating profits in SUPERVALU’s retail segment will continue to be negatively affected by consumers’ thrifty buying habits and as deflationary pressure on meats, eggs and dairy products lower top-line growth. Adding to SUPERVALU’s operating profit challenge is the highly competitive environment for its wholesale business customers, who are primarily independent food retailers or small retail grocery chains. These customers are being squeezed by larger, better-capitalized traditional supermarkets and alternative food retailers. Positively, SUPERVALU has had some recent success in signing up new customers for its distribution business, including Marsh Supermarkets and The Fresh Market.

Mickey Chadha Vice President - Senior Credit Officer +1.212.553.1420 manoj.chadha@moodys.com

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

NEWS & ANALYSIS Credit implications of current events

3 MOODY’S CREDIT OUTLOOK 24 OCTOBER 2016

Abbott’s Vascular Products Sale Is Credit Negative Last Tuesday, Abbott Laboratories (A2 review for downgrade), which is in the process of acquiring St. Jude Medical, Inc. (Baa2 review for downgrade), announced that both companies had reached an agreement in principle to sell certain vascular closure products to Terumo Corporation (unrated) for about $1.12 billion. In our view, Abbott will use some of the proceeds from this sale and from its previously announced divestiture of its optics business to eliminate some of the equity that it had planned to use to fund its acquisitions of St. Jude Medical and Alere Inc. (B2 review for upgrade). This plan is more credit negative than the company’s original financing plan, but not enough for us to change our expectations for Abbott’s ultimate ratings after it closes the St. Jude Medical and Alere acquisitions.

We believe that Abbott remains committed to a capital structure that would result in initial debt/EBITDA of 4.5x when it closes the St. Jude Medical and Alere deals. We also believe that the company is committed to deleveraging to 3.5x within two years post-close. However, Abbott has previously stated that it will offset dilution associated with the optics business, which implies that it will eliminate the $3 billion in equity issuance that it had originally contemplated in conjunction with the St. Jude Medical and Alere acquisitions. We estimate after-tax proceeds of approximately $5 billion from the sale of both the medical optics and vascular assets.

The vascular divestiture, which is subject to antitrust regulatory approvals and the successful completion of Abbott’s acquisition of St. Jude Medical, includes St. Jude Medical’s AngioSeal and Femoseal vascular closure products and Abbott’s Vado Steerable Sheath products. Abbott will retain its vascular closure products. Although Abbott has not disclosed specifics regarding the sales, earnings and cash flow associated with this divestiture, we believe these products likely have higher margins than Abbott’s medical optics products. We also believe that Abbott will reduce total borrowings for the St. Jude Medical and Alere acquisitions by an amount that will offset any lost earnings associated with these assets, resulting in pro forma initial debt/EBITDA of 4.5x.

Abbott appears to be making this divestiture to satisfy regulatory concerns regarding the St. Jude Medical acquisition, which Abbott expects to close by year-end. We expect that Abbott’s senior unsecured ratings will be downgraded to Baa3 with a stable outlook following the close of the St. Jude Medical and Alere deals. We initially placed Abbott’s ratings on review for downgrade in February when it announced plans to acquire Alere, a diagnostics manufacturer, for $8.4 billion. The ratings remained on review after Abbott in April announced plans to acquire St. Jude Medical, a cardiac device maker, for about $31 billion (including St Jude’s $5.7 billion of net debt).

Diana Lee Vice President - Senior Credit Officer +1.212.553.4747 diana.lee@moodys.com

NEWS & ANALYSIS Credit implications of current events

4 MOODY’S CREDIT OUTLOOK 24 OCTOBER 2016

VeriSign’s Extension of .Com Registry Agreement Is Credit Positive Last Thursday, VeriSign, Inc. (Ba2 stable) announced that it had reached agreements with the Internet Corporation for Assigned Names and Numbers (ICANN) and the US Department of Commerce (DOC) to extend the term of the company’s .com registry agreement ahead of its November 2018 expiration. Under the agreement, VeriSign will remain the sole registry provider for the .com generic top level domains (gTLDs) through November 2024. The extension of the .com registry agreement well ahead of its scheduled expiration is credit positive for VeriSign because it removes a major uncertainty surrounding the .com gTLD registry, which accounts for the bulk of the company’s profits. It will also allow management to focus on executing its growth strategy.

VeriSign and ICANN extended the .com registry agreement in conjunction with VeriSign’s new Root Zone Maintainer Service Agreement with ICANN, under which VeriSign will now maintain the Internet’s root zone maintenance obligations for ICANN, which it had previously maintained on behalf of the US government.

The DOC has reserved the right to conduct a public interest review of the separate cooperative agreement between VeriSign and the DOC before determining whether to extend that agreement. Under the agreement, which is due to expire in November 2018, the DOC has enforced certain federal antitrust conditions, including a $7.85 wholesale price cap on the .com domain product and limitations on VeriSign’s ability to provide downstream services. Although this creates uncertainty, especially concerning the future wholesale price for .com domain names, we believe that the downside risks to VeriSign are low. Possible outcomes of a review by the DOC include reduction in the maximum price for .com domain names, extending the current cap or an increase in the maximum price.

The risk of a reduction in the maximum price is low because we believe that competition in the domain names market has increased over the past few years. VeriSign has maintained the $7.85 price for the .com registry since 2012, during which query loads have increased substantially and the cost of providing reliable and secure domain name system infrastructure has increased. VeriSign has a solid track record of meeting the network performance requirements under its registry agreement with ICANN. In addition, the share of .com domain names in assigned gTLDs has declined steadily to 38% in the second quarter of 2016 from about 42% in 2009. We expect this trend to continue because of the relative faster growth in competing country code top level domains and the availability of more than 1,000 new gTLDs over the past two years.

VeriSign’s corporate family rating remains solidly positioned in the Ba2 rating category, reflecting the company’s growth in profitability and expectations of stable leverage and financial policies. Revenue growth in 2016 will likely exceed 7%, topping our previous expectations. We expect non-GAAP gross profit margins of 63%-64%, versus 61.5% in 2015. However, we expect VeriSign to use the majority of its free cash flow to return capital to shareholders. Total debt/EBITDA, as adjusted by us, was 3.5x for the 12 months that ended June 2016. We expect VeriSign’s total debt/EBITDA to remain at 3.5x-4.0x over the next 12-18 months.

Raj Joshi Vice President - Senior Analyst +1.212.553.2883 raj.joshi@moodys.com

NEWS & ANALYSIS Credit implications of current events

5 MOODY’S CREDIT OUTLOOK 24 OCTOBER 2016

Glencore’s Disposal of Its Australian Rail Asset Is Credit Positive Last Thursday, Glencore International AG (Baa3 stable) announced that it had agreed to sell its rail coal haulage business in Australia for AUD1.14 billion (approximately $875 million). The sale is credit positive because it will add to the company’s cash and support accelerated debt reduction this year without materially affecting earnings.

The divestment is part of the debt reduction plan the company announced at the end of 2015. Glencore is well positioned to meet its target to reduce its net funding position to $31-$32 billion in this year and to below $30 billion next year, from $41.3 billion reported in January. (Glencore calculates net funding as the difference between reported gross debt and reported cash balances.)

Divestments have been an important driver of the company’s accelerated reduction in net debt this year. The sale of the infrastructure asset in Australia will bring this year’s agreed divestments to around $4.8 billion. In April and June, Glencore announced $3.1 billion of cash divestments of 49.9% stakes in its agricultural business. The divestments did not affect the company’s earnings or free cash flow generation capacity. We expect Glencore to generate flat adjusted earnings of around $9.5 billion and strong free cash flow of around $4.0 billion in 2016.

The company’s Moody’s-calculated gross adjusted leverage peaked in 2015 at around 4x debt/EBITDA. This year, Glencore continues to repay its debt. Taking into account debt maturities and Glencore’s additional $1.4 billion bond buyback this month, we expect the company’s gross adjusted leverage to improve to around 3.2x this year. Strong execution on divestments and strong free cash flow generation should allow Glencore to maintain and improve its leverage position.

Glencore is a Switzerland-based natural resource company based involved in metals and minerals, energy and agriculture. The company is active in all key base metals (copper, zinc, nickel and aluminium), thermal and metallurgical coal, and oil and agricultural commodities (grains, oilseeds, cotton and sugar).

Elena Nadtotchi Vice President - Senior Credit Officer +44.20.7772.5380 elena.nadtotchi@moodys.com

NEWS & ANALYSIS Credit implications of current events

6 MOODY’S CREDIT OUTLOOK 24 OCTOBER 2016

SGL Carbon’s Sale of Its Loss-Making Graphite Electrode Business Is Credit Positive Last Thursday, SGL Carbon SE (Caa1 stable) announced that it had reached an agreement with Japanese chemical engineering company Showa Denko (unrated) to sell SGL Carbon’s graphite electrode business for cash proceeds of at least €200 million. The announcement is credit positive for SGL Carbon because the business it is selling is loss-making. The expected proceeds also will support SGL Carbon’s weak liquidity after two consecutive years of negative free cash flow, reduce Moody’s-adjusted net debt to €1.1 billion from €1.3 billion as of 30 June 2016, and improve Moody’s-adjusted net debt/EBITDA to 6.2x pro forma for the transaction from 7.6x.

We also view positively the company’s announcement of further divestments in early 2017 for the cathodes, furnace lining and carbon electrode businesses, along with a possible rights issue. The cumulated proceeds should allow SGL Carbon to repay debt and strengthen its capital structure, which is currently unsustainable. The company had a Moody’s-adjusted debt/EBITDA of 8.6x as of 30 June 2016, and we expect that will deteriorate to above 10.0x at the end of 2016.

Since mid-2013, the profitability of graphite electrodes, which are used in the steel industry, has been hit by a decline in prices and demand that has affected the industry worldwide. As a result, SGL Carbon’s Performance Products division, which includes graphite electrodes, cathodes, furnace linings and carbon electrodes, has deteriorated considerably, with the division’s EBIT margin before non-recurring charges falling to 4% in 2015 from 19% in 2012. Although management has endeavoured to restructure the business, we expect the division’s profitability to further deteriorate in 2016, and for EBITDA to turn slightly negative.

Selling the graphite electrode business will allow SGL Carbon’s management to focus solely on its growing carbon fibre and graphite materials divisions, which are strategic businesses for SGL Carbon’s main shareholders, automakers Bayerische Motoren Werke Aktiengesellschaft (A2 positive) and Volkswagen Aktiengesellschaft (A3 negative).

Wiesbaden, Germany-based SGL Carbon generated 2015 revenues of approximately €1.3 billion and a Moody’s-adjusted EBITDA of €159 million. The company’s Performance Products division manufactures carbon and graphite-based electrodes for the steel industry and cathodes and furnace linings for the aluminium industry. Its Graphite Materials and Systems division produces advanced graphite materials and natural graphite products for the chemical, automotive, solar, semiconductor and light-emitting diode industries. Its Carbon Fibres and Materials business unit manufactures carbon fibre-based products and composite material products primarily for the automotive and wind energy industries.

Florent Martel Associate Analyst +44.20.7772.5634 florent.martel@moodys.com

Hubert Allemani Vice President - Senior Analyst +44.20.7772.1785 hubert.allemani@moodys.com

NEWS & ANALYSIS Credit implications of current events

7 MOODY’S CREDIT OUTLOOK 24 OCTOBER 2016

UPC’s Acquisition of Multimedia Polska Will Be Credit Positive Last Tuesday, Liberty Global plc (Ba3 stable), the parent of UPC Holding B.V. (Ba3 stable), announced that 100%-owned subsidiary UPC Poland had agreed to acquire Multimedia Polska (MMP, unrated) for PLN3.0 billion ($760 million). The acquisition is credit positive for UPC because it will help the company strengthen its market position in Poland, result in annual run-rate synergies of $30 million from revenue and cost-related items, and slightly improve leverage metrics. Following this announcement, we affirmed UPC’s ratings and stable outlook.

We expect that the acquisition will be funded with a combination of cash, funds down-streamed from Liberty Global and only limited (if any) incremental debt at UPC. The transaction excludes MMP’s existing insurance, gas and energy operations, which MMP’s current owners will keep. Liberty Global expects that the transaction, which is subject to customary closing conditions including regulatory approval, will close within the next 12 months.

The combined networks of UPC Poland and Multimedia pass 4 million homes and businesses and together will be able to compete more effectively. Furthermore, acquiring MMP will be immediately de-leveraging because it will bring about PLN363 million of annual EBITDA to UPC. At the end of 2016, we expect UPC’s leverage to improve to a Moody’s-adjusted debt/EBITDA of less than 5.25x pro forma for the acquisition, assuming steady operating momentum in the second half of 2016 and no material incremental debt at UPC. As of 30 June 2016, UPC reported third-party debt of just under €6 billion, which translated into a Moody’s-adjusted gross debt/EBITDA ratio of around 5.5x (on a last-two-quarters annualized basis), above our quantitative leverage guidance for UPC’s Ba3 rating. Given UPC’s high leverage before the MMP acquisition, UPC’s ratings risk being negatively affected if the acquisition does not go through or if the company incurs additional debt and fails to reduce leverage in line with our expectations.

UPC’s total accrued capital expenditure increased to €278.8 million, or 20.1% of revenue, in the first half of 2016, versus €261.3 million, or 17.8%, in the year-ago period. The increase reflects footprint expansion, as UPC built or upgraded more than 200,000 new homes in Central and Eastern Europe (CEE) and more than 20,000 homes in Switzerland and Austria during the first half of 2016. The company remains on track to connect its network or upgrade to two-way service in approximately 50,000 homes in Switzerland and Austria and 600,000 homes in CEE. We expect the ratio of total capex to sales to increase to 22%-24% in 2016 and approach the mid-twenties or higher over the next two to three years as the company considers new build projects, particularly in CEE. In this regard, we cautiously take into account the execution risks associated with the timely and effective delivery of the company’s network expansion plans.

At the end of 2015, UPC’s Moody’s-adjusted cash flow from operations/debt ratio was 9.3%. We expect this ratio to improve, helped by its investments in new building projects improving the company’s operating performance. The company’s free cash flow generation (after capex and including vendor financing repayments) is at risk of remaining negative because of elevated capex. In 2015, the company’s Moody’s-calculated free cash flow was negative at around €35 million after accounting for Moody’s-adjusted capex of €639 million (including €446 million of vendor financing repayments).

Gunjan Dixit Vice President - Senior Analyst +44.20.7772.8628 gunjan.dixit@moodys.com

NEWS & ANALYSIS Credit implications of current events

8 MOODY’S CREDIT OUTLOOK 24 OCTOBER 2016

COFCO Meat’s Planned IPO Is Credit Positive for COFCO HK Last Wednesday, COFCO Meat Holding Limited (unrated), a 37% indirectly owned subsidiary of COFCO (Hong Kong) Limited (COFCO HK, A3 review for downgrade), announced its plan to issue 975.6 million new shares in an initial public offering (IPO), 10% of which will be a public offering at HKD2.00-HKD2.65 a share. COFCO Meat’s listing is credit positive for COFCO HK. The listing will give COFCO Meat access to capital markets and reduce its reliance on debt, which is consolidated on COFCO HK’s balance sheet. Ultimately, less debt for COFCO Meat will reduce COFCO HK’s debt. COFCO HK’s adjusted net debt/EBITDA was around 7.4x at year-end 2015. Such a high leverage negatively pressures COFCO HK’s ratings.

The company expects to raise up to HKD2.6 billion from the IPO, which it expects to start between 19 and 24 October, and list through Hong Kong Exchanges and Clearing Limited on 1 November. The IPO proceeds will equal around 4% of COFCO HK’s adjusted net debt in 2015 and 36% of its capex for 2015. COFCO Meat said that it will use the proceeds mainly to expand feed-production capacity, repay loans and expand its sales network.

In August, we put COFCO HK’s rating on review for downgrade because execution risks associated with its rapid expansion, and its weakened financial profile, particularly its high net debt/EBITDA following its acquisition of COFCO Agri Limited (unrated), previously known as Nobel Agri, and Nidera B.V. COFCO HK remains on review for downgrade.

COFCO Meat is one of China’s major importers of poultry, pork, beef and lamb and is one of the important companies in COFCO HK’s food and packaging business in terms of revenue. COFCO HK holds eight listed companies. The public listing of COFCO Meat will also help COFCO HK improve its transparency and corporate governance because of increased disclosures to investors.

COFCO HK is a wholly owned offshore subsidiary of COFCO Group, which is wholly owned by the Chinese government through the State-Owned Assets Supervision and Administration Commission of the State Council. COFCO Group is the largest supplier of agricultural and food products in China by revenue. It serves as one of the main importing and exporting channels for bulk agricultural products, and plays important policy roles in the procurement of grain, circulation and logistics. COFCO Group’s revenue was RMB405 billion in 2015.

Kai Hu Senior Vice President +86.212.057.4012 kai.hu@moodys.com

Yan Li Associate Analyst +86.106.319.6572 yan.li@moodys.com

NEWS & ANALYSIS Credit implications of current events

9 MOODY’S CREDIT OUTLOOK 24 OCTOBER 2016

Banks

Brazil’s Rate Cut Is Credit Positive for Banks Last Wednesday, Brazil’s central bank for the first time in four years cut its SELIC monetary policy rate and signaled that it may reduce rates further if inflationary pressures continue to ease. The central bank lowered the rate by 25 basis points to 14%, and market participants are already pricing in expectations that Brazil’s policy easing cycle will continue through the end of 2017. Lower interest rates will help reduce funding costs, improve asset quality and support loan growth for Brazilian banks, all credit positives.

A lower SELIC rate will help reduce banks’ funding costs, which will re-price at lower rates quickly. Roughly 41% of banks’ funding instruments, including deposits and deposit-like funding instruments, carry floating rates that will automatically fall as a result of the SELIC rate reduction. Meanwhile, banks’ large portfolios of fixed-rate loans will take longer to re-price and the extent to which these loans are not swapped to floating rates will support a widening of net interest margins during the easing cycle. This will support profitability, which has been negatively affected by slow loan growth and elevated credit costs during Brazil’s recession, and offset lower income from investments in government securities.

The banks that will benefit most will be primarily large retail banks with long-term loans fixed at previously determined higher rates. These banks include Itau Unibanco S.A. (Ba2/Ba2 negative, ba21), Banco Bradesco S.A. (Ba2/Ba2 negative, ba2), Banco do Brasil S.A. (Ba2/Ba2 negative, ba2), Banco Santander (Brasil) S.A. (Ba1/Ba1 negative, ba2) and Caixa Economica Federal (Ba2/Ba2 negative, b1). Lower funding costs will also benefit midsize payroll lenders because regulations often cap lending rates for this asset class. Affected lenders include Banco do Estado do Rio Grande Do Sul S.A. (Ba3 stable, ba3), Banco BMG S.A. (B1/B1 stable, b1), Banco Pan S.A. (B1/B1 stable, b2), Banco Cetelem (Ba1 negative, ba3) and Banco Mercantil do Brasil S.A. (B3/B3 negative, b3).

Lower rates will help arrest the decline in lending across the banking system. During the last-12-month period that ended in August 2016, total loans fell 9.9% in real terms, led by a 14.0% drop in corporate loans. Additionally, lower financing costs will alleviate negative financial pressure facing both corporate and household borrowers, and will help lower banks’ level of problem loans, which have steadily risen over the past year (see Exhibit 1).

1 The bank ratings shown in this report are the bank’s local deposit rating, senior unsecured debt rating (where available) and baseline

credit assessment.

Alcir Freitas Vice President - Senior Credit Officer +55.11.3043.7308 alcir.freitas@moodys.com

Farooq Khan Analyst +55.11.3043.6087 farooq.khan@moodys.com

NEWS & ANALYSIS Credit implications of current events

10 MOODY’S CREDIT OUTLOOK 24 OCTOBER 2016

EXHIBIT 1

Brazilian Banks’ 90-Day Problem Loans as a Percent of Total Loans

Source: Central Bank of Brazil and Moody’s Investors Service

Because of Brazil’s deep recession over the past three years, debt burdens and leverage metrics at non-financial companies listed on Brazil’s stock exchange have steadily deteriorated, with the median interest coverage ratio (as measured by the ratio of EBITDA to financial expenses), falling to 1.1x in June 2016 from 1.9x in December 2014, according to the central bank’s latest financial stability report. Over the same period, this same group of companies’ median net debt/EBITDA rose to 3.1x from 2.5x (see Exhibit 2). Tight monetary policy remained a drag on the corporate sector throughout the downturn, and lower rates will provide relief. Household borrowers may also benefit from lower rates, given that the share of interest payments in households’ debt-service burden increased to 48% in July 2016 from 44% a year earlier.

EXHIBIT 2

Credit Metrics of Corporates Listed on Brazil’s Stock Exchange

Sources: Central Bank of Brazil and Moody’s Investors Service

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16

Corporate Households

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5xInterest Coverage Ratio Net Debt/EBITDA

NEWS & ANALYSIS Credit implications of current events

11 MOODY’S CREDIT OUTLOOK 24 OCTOBER 2016

Lebanese Banks’ Decline in Foreign Assets Is Credit Negative Last Wednesday, Banque du Liban (BdL), Lebanon’s central bank, published data showing that Lebanese banks’ foreign assets, mostly in the form of foreign bank placements, had declined by $1.9 billion between May 2016 to August 2016, and by $1.1 billion in August alone. As a result, Lebanese banks’ net foreign liabilities increased to $18 billion in August from $15 billion at the beginning of the year, a credit-negative acceleration of a trend that began in 2011, when banks had a net foreign asset position (see Exhibit 1). The repatriated $1.9 billion of foreign assets were invested in long-term Lebanese government (B2 negative) Eurobonds and BdL certificates of deposits (CDs) that increased the banks’ overall exposure to the sovereign.

EXHIBIT 1

Lebanese Banks’ Net Foreign Asset/(Liability) Position Liabilities have grown since May 2016.

Source: Banque du Liban

The large reduction in Lebanese banks’ foreign assets is the result of a BdL financial operation that began in May. Although the BdL has not disclosed details of this operation, we estimate, based on news reports and published figures, that BdL bought $2 billion of Eurobonds from the Lebanese Ministry of Finance in exchange for an equivalent amount of debt denominated in Lebanese pounds. Additionally, there are reports that BdL bought roughly $6 billion of Lebanese pound-denominated Treasury bills over the summer from commercial banks at a premium and sold them the $2 billion in Eurobonds and an additional $4 billion in CDs. Banks were required to keep the profits generated from these transactions as Lebanese pound-denominated reserves ahead of the implementation of International Financial Reporting Standard No. 9, which takes effect in 2018. Banks will be allowed to recognise any excess as profits once they have taken those provisions.

The transaction grew BdL’s foreign assets to a record $40.6 billion at the end of September 2016 from $34.6 billion in May (see Exhibit 2). Including gold, BdL’s foreign assets now cover a record 26 months of imports. As a result of slowing financial inflows into Lebanon, BdL’s foreign assets had been declining since July 2015. Domestic political paralysis and ongoing regional instability led to almost flat GDP growth, and deposit growth slowed in the first half of the year to $3.2 billion from $4.2 billion in the year-ago period. Lebanon continues run a large budget deficit, which we forecast at 8%-9% of GDP for 2016-17, and relies on the domestic banking system to finance that deficit.

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Marina Hadjitsangari Associate Analyst +357.25.693.034 marina.hadjitsangari@moodys.com

Alexios Philippides Assistant Vice President - Analyst +357.25.693.031 alexios.philippides@moodys.com

NEWS & ANALYSIS Credit implications of current events

12 MOODY’S CREDIT OUTLOOK 24 OCTOBER 2016

EXHIBIT 2

Lebanese Central Bank’s Foreign Assets Excluding Gold Following the central bank’s transactions, foreign assets grew to a record $40.6 billion.

Source: Banque du Liban

The transactions have significantly reduced Lebanese banks’ dollar liquidity and have increased banks’ already large exposures to Lebanese government Eurobonds, which we estimate are at 1.2x banks’ Tier 1 capital as of July 2016. We estimate the banking sector’s overall government exposure2 to be more than 5x banks’ Tier 1 capital. As a result, banks raised interest rates on dollar deposits to a weighted average of 3.39% in August from 3.26% in May to attract additional inflows and shore up liquidity. Deposits grew by $2 billion in August alone, and we estimate that deposits placed at Lebanese banks now equal 300% of GDP, one of the highest ratios globally. Some banks were also able to recover some of their foreign liquidity by selling Eurobonds in the secondary market to foreign banks.

The BdL swaps significantly increased banks’ Lebanese pound-denominated liquidity and will negatively affect their net interest income for the year if not invested in higher-earning assets. We therefore expect most of this liquidity to be placed either in local currency BdL CDs or Lebanese Treasury bills because loan demand is limited owing to Lebanon’s economic slowdown.

2 Defined as local and foreign currency government debt securities, investments in Banque du Liban certificates of deposits and non-

reserve deposits with Banque du Liban.

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NEWS & ANALYSIS Credit implications of current events

13 MOODY’S CREDIT OUTLOOK 24 OCTOBER 2016

Sovereigns

Croatian Parliament’s Broad-Based Support for New Government Suggests Credit-Positive Stability Last Wednesday, Croatia’s (Ba2 negative) parliament voted in favour of the newly nominated government of Prime Minister Andrej Plenkovic, ending political instability after the previous government fell just five months into its term. The level of parliamentary approval, as well as the coalition arrangements between the main partners, suggests that a stable government will now emerge, a credit positive. A stable government is necessary in order to implement public-sector reforms, boost investor confidence and continue fiscal consolidation.

The new government includes the Croatian Democratic Union (HDZ) and its junior coalition partner Most (Bridge). It received 91 of 151 votes, with the support of 17 members of minority groups and smaller parties. This comfortable majority gives Mr. Plenkovic, HDZ’s leader, a stronger footing than his predecessor, Tihomir Oreskovic. Mr. Oreskovic was a technocrat who was brought down in June after a dispute between HDZ and Most.

Mr. Plenkovic has a strong power base and has managed to attract broad-based support, even from the Serbian minority, by removing controversial figures from his cabinet. The relationship between the two main coalition partners appears to be more stable, with a clear agreement that provides for the rotation of the speaker of the house. An additional degree of support from other parties will allow the government to function even if Most leaves the coalition.

Broad-based parliamentary support places the government in a stronger position to undertake challenging public-sector reforms and put the government’s finances on a more sustainable footing. Those reforms include the introduction of a contentious value-based real estate tax, which the government expects will boost government revenues by 1% of GDP at full implementation; streamlining public administration; and privatising key state-owned enterprises. These reforms would help the authorities achieve their target by reducing Croatia’s public debt by 10 percentage points of GDP.

The government’s stronger position will give it leverage in forthcoming negotiations with the trades unions over a 6% hike in public-sector salaries affecting up to 250,000 employees, over which the unions have threatened legal action if they do not get their full wage increase. The International Monetary Fund estimates that the wage hike would cost the government 0.5% of GDP per year, which would risk jeopardising Croatia’s nascent recovery in public finances recorded over the past year. That recovery has been driven mainly by a cyclical upturn in tax collection (an 8.1% increase in the first half of 2016 from the previous year) following a strong tourist season.

A stable coalition will help to restore investor confidence and improve Croatia’s business environment, both of which are necessary to reduce refinancing risks and lift growth. We estimate that the government’s gross borrowing requirements will be more than 20% of GDP between 2017 and 2019, and that a significant proportion of that amount will come from external sources (see Exhibit 1). Political instability was a principal cause of delay in the issuance of a 10-year Eurobond in June 2016.

Simon Griffin Vice President - Senior Analyst +49.69.70730.764 simon.griffin@moodys.com

Vasil Nikolov Associate Analyst +44.20.7772.1533 vasil.nikolov@moodys.com

NEWS & ANALYSIS Credit implications of current events

14 MOODY’S CREDIT OUTLOOK 24 OCTOBER 2016

EXHIBIT 1

Croatia’s Gross Borrowing Requirements and Interest Payments as a Percentage of GDP and Revenues

Sources: Eurostat, Haver Analytics and Moody’s Investors Service forecasts

Zdravko Maric’s remaining in his role as finance minister will be conducive for the continuation of policies aimed at providing stability to the tax regime. According to the World Economic Forum, an inefficient bureaucracy, policy instability and burdensome tax regulations are the greatest challenges when doing business in Croatia, with frequent policy and regulatory changes deterring investment (see Exhibit 2). The previous government’s National Reform Programme, presented in April 2016, aimed to address these issues and the new government is in a good position to implement them.

EXHIBIT 2

Croatia’s Most Problematic Factors for Doing Business, Percentage of Responses

Source: World Economic Forum Global Competitiveness Report, 2013-14 and 2016-17

0%

2%

4%

6%

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2017Forecast

2018Forecast

2019Forecast

General Goverment Interest Payments to Revenue Gross Borrowing Requirements as Percent of GDP

0%

3%

6%

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Inefficientgovernmentbureaucracy

Tax rates Policyinstability

Taxregulations

Corruption Access tofinancing

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regulations

Insufficientcapacity to

innovate

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Poor workethic innational

labour force

2016 2013

NEWS & ANALYSIS Credit implications of current events

15 MOODY’S CREDIT OUTLOOK 24 OCTOBER 2016

Namibia’s Increase to Teachers’ Salaries in Fiscal 2018 Will Challenge Fiscal Consolidation Last Monday, the Government of Namibia (Baa3 stable) agreed with the Namibia National Teachers’ Union on an across-the-board salary increase for fiscal 2018 (ending 31 March 2018). We estimate that the salary increase will raise the total civil service wage bill by about 0.5% of GDP. The decision to raise expenditures is credit negative because it adds negative pressure to Namibia’s relatively weak fiscal balance when revenue from commodity exports and the Southern Africa Custom Union are falling and low growth is challenging domestic revenues.

According to the International Monetary Fund’s World Economic Outlook forecasts in October 2016, Namibia’s budget deficit was 8.5% of GDP in fiscal 2016 (up from an earlier forecast of 5.3% of GDP). This implies that reaching the original fiscal consolidation target of a 4.3% deficit in fiscal 2017 will take longer and require more effort than originally expected. Even in the unlikely event that the wage increase is offset by other cuts and the overall spending is the same, the rise in salaries implies that capital spending will likely fall, reducing long-term growth potential.

Namibia’s wage bill is already high, even by regional standards, and amounts to 42% of revenue and 14.4% of GDP (see exhibit). The large expenditures on personnel crowd out capital and investment spending and undermine growth. Moreover, Namibia’s debt has been accumulating rapidly.

Namibia’s and Regional Peers’ Public Wage Outlays in Fiscal 2015

Percent of GDP Percent of Government Expenditures

Botswana 11% 32%

Lesotho 18% 38%

Namibia 14% 37%

South Africa 12% 35%

Swaziland 11% 49%

Zambia 9% 34%

Note: Fiscal 2015 was used for countries in the Southern African Customs Union. Zambia’s fiscal year matches the calendar year. Sources: International Monetary Fund and Moody’s Investors Service estimates

In December 2015, we affirmed Namibia’s Baa3 rating and stable outlook after the government announced in October 2015 that it would accelerate fiscal consolidation in fiscal 2017. Although consolidation is underway this year, the size of the deficit and financing needs are much higher than envisaged in the budget announced in February 2016.

Namibia’s high future funding needs pose a significant challenge for the government given the government securities already on banks’ balance sheets and the reduced risk tolerance of international investors. Domestic borrowing costs have risen over Namibia’s current monetary policy tightening cycle following South Africa’s policy rate increases. Although we do not expect further tightening this year, domestic borrowing costs may still rise because of the banking sector’s lower appetite for government securities and the reduced credibility of fiscal policy stemming from a higher-than-expected public debt/GDP ratio.

Namibia’s financing options in the international capital markets are now more limited given the domestic policy slippages and investors’ reduced risk appetite. Slightly below three months of imports, foreign exchange reserves declined notably over the past 12 months, reflecting the lack of fiscal constraint.

Zuzana Brixiova Vice President - Senior Analyst +44.20.7772.1628 zuzana.brixiova@moodys.com

Thaddeus Best Associate Analyst +44.20.7772.1024 thaddeus.best@moodys.com

NEWS & ANALYSIS Credit implications of current events

16 MOODY’S CREDIT OUTLOOK 24 OCTOBER 2016

Zambia’s Sizable Fiscal Deterioration Is Credit Negative Last Thursday, Zambia (B3 negative) Finance Minister Felix Mutati disclosed that he expected his country’s 2016 fiscal deficit on the commitment basis (that is, including arrears) to breach 10% of GDP this year. That is well above the 3.8% target announced in the 2016 budget speech in the fall of 2015, and exceeds our own March 2016 projection of a 7% deficit (see Exhibit 1). Larger-than-expected fiscal slippages are credit negative for Zambia and risk exacerbating the country’s existing liquidity challenges.

EXHIBIT 1

Zambia’s Fiscal Balance as a Percent of GDP

Sources: Zambian government and Moody’s Investors Service

Liquidity shortages were a key driver of our March 2016 decision to downgrade Zambia’s long-term issuer rating to B3 from B2 and change the outlook to negative from stable. The negative outlook reflected considerable risks skewed toward additional fiscal slippages that have now materialized.

Mr. Mutati’s announcement about the larger deficit came as the newly appointed minister updated parliament on the economy and as discussions are underway with the International Monetary Fund (IMF) about an economic recovery programme. The weaker fiscal performance is a result of a number of factors. There has been a buildup of arrears related to infrastructure projects (particularly in road construction), fuel subsidies are larger than the government expected and Zambia has had to import emergency electricity amid a power crisis. Minister of Energy Dora Silya stated in her February 2016 presentation to the parliament that the deficit between demand and supply was 1,000 megawatts, well beyond the government’s June 2015 estimate of 560 megawatts. Finally, both the cost of a farmer input support program that the government launched last year and expenditures at the country’s Food Reserve Agency exceeded budget estimates.

Expenditure growth is occurring amid subdued government revenues because slowing economic growth is constraining tax collections and low copper prices are depressing royalties. GDP growth slowed to 3% in 2015, less than half the average of the previous decade. We project that GDP growth will stay around 3% in 2016 before recovering modestly to 4% in 2017 as the copper sector improves and power shortages abate. Meanwhile, we estimate that Zambia’s debt/GDP has grown rapidly to 56.8% of GDP in 2016 from 18.9% in 2010, reflecting several years of sizable fiscal slippage and currency depreciation inflating the local currency equivalent of US dollar-denominated debt. We expect the government’s debt burden to approach 58% by 2017, with the interest/revenues ratio rising to 20% by 2017 from about 5% in 2011 (see Exhibit 2).

-11%

-10%

-9%

-8%

-7%

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-5%

-4%

-3%

-2%

-1%

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2011 2012 2013 2014 2015 Estimate 2016 Forecast

Moody's March 2016 Government's Fall 2015 Target without Arrears Government's Fall 2016 Estimated Outturn with Arrears

Zuzana Brixiova Vice President - Senior Analyst +44.20.7772.1628 zuzana.brixiova@moodys.com

Thaddeus Best Associate Analyst +44.20.7772.1024 thaddeus.best@moodys.com

NEWS & ANALYSIS Credit implications of current events

17 MOODY’S CREDIT OUTLOOK 24 OCTOBER 2016

EXHIBIT 2

Zambia’s General Government Debt and Debt-Servicing Cost

Sources: Zambian government and Moody’s Investors Service

We estimate that the 2016 deficit outcome to be announced in the November budget will exceed 8.5% for 2016 (excluding arrears) and narrow to 6.1% in 2017 if the government successfully reduces expenditures as part of the prospective IMF programme. Zambia’s high government funding needs in the coming quarters are a key risk, given the country’s relatively underdeveloped domestic capital market and international investors’ waning interest in buying Zambian debt.

Although the prospective IMF programme would improve liquidity by strengthening investor confidence in government policies and reforms, the negotiations will take time and require difficult choices by the government. The government already raised retail fuel prices by more than 30% in mid-October to help rein in the subsidy bill. The price adjustment is part of the government’s plan to phase out fiscal subsidies while simultaneously installing a social safety net to cushion the effect on the poor.

We believe the appointing of the more technocratic Mr. Mutati from the opposition party opens the possibility of a turnaround in policies and a gradual stabilization of Zambia’s fiscal situation. His candid presentation of the sovereign’s current fiscal challenges is a positive step.

0%

5%

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2010 2011 2012 2013 2014 Estimate 2015 Estimate 2016 Forecast 2017 Forecast

Public Debt/GDP - left axis General Government Interest Payments/Revenues - right axis

NEWS & ANALYSIS Credit implications of current events

18 MOODY’S CREDIT OUTLOOK 24 OCTOBER 2016

Sub-sovereigns

German Laender Will Benefit from Changes to Financial Equalisation System On 14 October, after years of negotiation, the German Federation and the 16 German states (laender) agreed to changes in the German financial equalisation system. From 2020 onward, the laender sector will benefit financially from a larger share of total tax revenues (at the expense of the central government). This confirms the laender’s strong position within the federation.

The heads of central and regional governments agreed to the new set of rules that will govern the German financial equalisation mechanisms after 2019, when the current system phases out. Key changes include the discontinuation of horizontal equalisation among the laender; higher equalisation payments to the laender from the federation (€9.5 billion per year, up from about €8 billion in 2015); and the dynamisation of a portion of these payments, resulting in annually increases in federal equalisation payments to the laender.

These changes provide a credit-positive boost to all laender. Starting in 2020, strong laender such as Baden-Wuerttemberg (Aaa stable) and Bayern (Aaa stable) will keep for themselves a significant amount of value-added tax funds previously redistributed to other laender. Baden-Wuerttemberg expects to improve its financial position by €600 million per year. Financially and/or structurally weaker laender such as Saxony-Anhalt (Aa1 stable), Brandenburg (Aa1 stable), Berlin (Aa1 stable) and Nordrhein-Westfalen (Aa1 stable) will continue to benefit from financial transfers of around the same size or slightly higher. Although the special purpose grants to former East German laender under the current system will be formally discontinued, the grants will be available for all structurally weaker regions, including those in Western German regions.

In exchange for the increased funds, the laender will give up certain roles in areas of high investment such as infrastructure and digitalisation. Although these areas are currently the sole responsibility of the laender, the federal government will now be able to take a much more proactive stance in, for example, constructing and maintaining roads through the establishment of a federal government agency. Furthermore, both the stability council’s and the federal audit office’s remits will be extended to strengthen oversight of laender budgets.

By international standards, Germany has one of the strongest equalisation systems, with a constitutional guarantee that regions receive appropriate revenues to fulfil their tasks. The current German equalisation system combines vertical and horizontal tax revenue equalisation between the laender and the federal government; financial equalisation between poor and rich laender and investment support from the federal government. Additional federal grants are available for specific purposes, such as infrastructure development in eastern Germany. The changes support our view that the laender operate in a strong institutional framework.

Juliane Sarnes Associate Analyst +44.20.7772.1392 juliane.sarnes@moodys.com

NEWS & ANALYSIS Credit implications of current events

19 MOODY’S CREDIT OUTLOOK 24 OCTOBER 2016

Italian Regions Will Benefit from Higher Healthcare Funding in 2017 On 15 October, Italian government announced an increase in the National Healthcare Fund (NHF) to €113 billion in 2017 from €111 billion in 2016, a credit positive for Italian regions.

The €2 billion increase will be divided and shared among Italian regions, easing their 2017 budgetary planning, given that healthcare transfer is about 75% of regions’ total revenues. In 2017, transferred revenues earmarked for healthcare as a percentage of regional total revenues span from 78% for Lombardy (Baa1 stable) to 63% for Basilicata. A structural revenue increase of 1%-2% will positively affect the financials of each issuer. Half of the funding increase, or €1 billion, will be transferred to regions without any spending constraints. The increase maintains positive growth in healthcare funding, which grew 5.8% during 2011-17 (see exhibit), and will reduce the regional healthcare deficit, which the Ministry of Finance expects will be around €1.7 billion in 2017 versus €5.7 billion in 2011.

Italy’s National Healthcare Fund Will Increase in 2017

Source: Italian government’s healthcare fund

The increase will be particularly beneficial for regions that have had a healthcare funding deficit. These include Lazio (Ba2 stable), which had a €364 million deficit in 2015; Sardinia (Baa2 stable), with a €342 million deficit; Liguria (Baa2 stable), with a €98 million deficit; and Molise (Ba1 stable), with a €25 million deficit. Conversely, regional governments with surpluses, such as Lombardy, Veneto (Baa2 stable) and Umbria (Baa2 stable), will allocate a portion of the funds to their capital expenditures.

In the past few years, the healthcare sector has focused mainly on improving operating expenditure efficiency through a rationalisation of hospital networks, a process that still underway. However, we expect the additional non-earmarked resources to unlock new investments, even if on a limited basis.

€ 107 € 108 € 107 € 110 € 110 € 111 € 113

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2011 2012 2013 2014 2015 2016 2017 Forecast

€Bi

llion

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Francesco Zambon Analyst +44.20.7772.1196 francesco.zambon@moodys.com

Gianluca Beltracchi Associate Analyst +44.20.7772.1054 gianluca.beltracchi@moodys.com

RECENTLY IN CREDIT OUTLOOK Select any article below to go to last Thursday’s Credit Outlook on moodys.com

20 MOODY’S CREDIT OUTLOOK 24 OCTOBER 2016

NEWS & ANALYSIS Corporates 2 » RSP Permian’s Planned Acquisition of Silver Hill Entities Is

Credit Positive » Ultrapar’s Proposed Liquigás Acquisition Is Credit Negative » Continental’s Acquisition of Hornschuch Group Is

Credit Positive » Manutencoop’s Liquidity Outlook Significantly Improves with

Potentially Smaller Antitrust Fine » Rosneft’s Acquisition of a Stake in Bashneft Is Credit Positive » Naspers’ Sale of Allegro and Ceneo Is Credit Positive

Infrastructure 9 » IEnova’s Capital Increase Is Credit Positive for It and

Parent Sempra » SSE Sells Stake in Scotia Gas Networks at a Premium, a

Credit Positive

Banks 11 » Bank Dhofar’s Termination of Proposed Bank Sohar Merger

Misses Opportunity to Improve Credit Quality » China Construction Bank-Led Equity Injection into Yunnan

Tin Benefits Chinese Banks

Asset Managers 13 » SEC Rules Aimed at Improving Open-Ended Funds’ Liquidity

Are Credit Negative for Retail Asset Managers

Sovereigns 15 » Montenegro’s Inconclusive Election Results Increase Policy

Risk, a Credit Negative

MOODYS.COM

Report: 192813

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